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Budgetary Treatment of Health Reform Proposals

May 27, 2009

The Congress is currently considering various approaches for instituting major changes in the nations system of health insurance. Some of those proposals would significantly expand the federal governments role in that system, thus raising the question of how such changes might be reflected in the federal budget. CBO has just released a brief describing the approach that CBO will take in judging the appropriate budgetary treatment.

Some of the budgetary judgmentsappear to be relatively straightforward in that the transactionsclearly involve cashflows of the federal government or of other entities acting on behalf of the government; they belong in the federal budget. Such transactions include the provision of subsidies forsome people andbusinesses; the income and expenditures of a public health insurance plan; the governments receipts from play-or-pay requirements and from penalties imposed on individuals who fail to comply with a health insurance mandate; and risk adjustment transactions of the government that shift funds from insurers with lower-risk enrollees to those with higher-risk enrollees.

The imposition of a federal mandate requiring individuals to have a certain minimum amount of health insurance coverage raises more complex issues of budgetary treatment. In considering those issues, CBO first addressed two basic questions. First, can cash transactions between private entitiesin which the funds do not pass through the U.S. Treasurybe reflected in the federal budget? The answer is clearly "yes" when a private entity is acting as an agent of the federal government in carrying out a federal program under the government's direction. Second, does the existence of a federal mandate, by itself, justify inclusion in the budget of the private-sector costs of the mandated activity? CBO concludes that the answer to that question is "no," because the federal government imposes a variety of mandates on private entities whose associated costs are not included in the budget.

In CBO's view, the key consideration is whether a proposal would be making health insurance an essentially governmental program, tightly controlled by the federal government with little choice available to those who offer and buy health insuranceor whether the system would provide significant flexibility in terms of the types, prices, and number of private-sector sellers of insurance available to people. The formera governmental programbelongs in the federal budget (including all premiums paid by individuals and firms to private insurers), but the lattera largely private-sector systemdoes not.

Many of the proposals under consideration would establish some sort of insurance exchanges, through which individuals, and in some cases, small firms could purchase health insurance. The question arises as to whetherpayments by individuals and employers that pass through exchanges should be considered receipts of the federal government andpremiums paid through exchanges to insurance companies as outlays of the government; alternatively, those transactions could be considered private transactions that should not be reflected in the federal budget. In CBOs view, the answer partly dependson whether individuals and firms would direct their payments toexchanges that in turn would pay insurers, or whether individuals and firms would make their payments via the exchanges to the insurers themselves. In the former case, the answer wouldalso depend on whether the exchanges were considered to be federal entities (either federal agencies or nonfederal entities acting as agents of the federal government) or not. If payments would be made to and byexchanges, and if the exchanges were effectively federal entities, then the payments should be included in the federal budget. However, if the payments were made directly from individuals and firms to insurance companies via exchanges, or if the payments were made to and by the exchanges but the exchanges were not federal entities, then the payments should not be included in the budget (unless other criteria would justify their inclusion in the budget).

In sum:

Premium incomefor a public plan (or plans) and for insurance purchased through exchanges or in the private marketshould be classified as federal revenues if there is an individual mandate and tight government control of the insurance market. The corresponding expenditures should also be recorded as outlays in the budget. Similarly, if there is an individual mandate and a dominant public planavailable to some segments of the insurance market, premiums and outlays for those segments of the market should appear in the budget and the premium income should be classified as revenues.

Premium income should be classified as an offset on the outlay side of the budgetalong with the corresponding spending counted as outlaysif:

Premiums are collected for a public plan but there is no mandate, or

There is an individual mandate in conjunction with an active, loosely restricted private market, and premiums are collected for a public plan or by governmental exchanges.

Outlays for premiums and income from the receipt of those premiums should not appear in the federal budget if:

There is no mandate and no public plan, or

There is an individual mandate and an active, loosely restricted private market, and if premiums are paid through nongovernmental exchanges or directly to insurers.